Most consumers 30% over budget

Cape Town - Most consumers do not save and then have to depend on credit to deal with economic and life shocks.

July is Savings Month and consumers are being urged to cultivate a culture of saving.

Most consumers who approach the National Debt Mediation Association (NDMA) for assistance operate with a budget deficit of more than 30%, because their debt repayments and living expenses added together exceed their net income.

If consumers do not reduce their levels of debt, improve their money management skills, and try to put aside money for emergencies, education, retirement and other important items, the savings ratio in South Africa will not improve.

NDMA cases show that reasons for this situation vary.

It could be due to over-indebtedness due to having taken on/been granted debt in excess of affordability capacity or consumers not fully disclosing their financial standing.

The abuse of debt enforcement mechanisms like emolument attachment orders, collection of prescribed debt and debt collection fees that add an undue burden to the consumer is another possible reason.

It is often the case of changed family or personal circumstances that have resulted in unforeseen temporary or more permanent income and or expenditure shocks or changes such as:

* Illness/medical expenses in the family or extended family;

* Death of a spouse or other family member contributing to household income;

* Loss of employment of one or more people in the family/ household;

* Involuntary change in the borrower's employment status/ income;

* Rising cost of living due to increases in fuel and amenities;

* Unforeseen emergency expenses.

An analysis of the income and expenses of consumers shows that it is possible, with discipline and adjustments to the budget by cutting out unnecessary expenses, for some to manage to afford their living expenses, repay their debt and save.

This however takes commitment and perseverance. Unfortunately this is not the case for many consumers whose budget deficit is such that the only option is to negotiate the reduction of their monthly debt repayment obligations or for them to go under debt counselling.

There is a sizeable chunk of consumers whose debt levels are so high that even a reduction in monthly obligations does not assist in addressing the debt stress experienced.

This is the case with consumers whose income has reduced due to divorce, retrenchment, unemployment or the failure of a business venture.

While it's difficult to even think about saving when salaries are being frozen, workers retrenched, and costs such as food, electricity and petrol just keep going up, now is the time to be sharp with less cash.

"When times are tough, it's more important than ever to make sure you're tightening your belt and saving as you'll need it for tomorrow," says NDMA CEO, Magauta Mphahlele.

She offers five tips to at least make a start:

Planning ahead

Ideally you should be saving between 10% and 15% of your income and putting it in different types of saving and investment products based on your short and long term needs and goals.

By putting away money each month, you'll also be building the discipline needed to save.

Even better, use a direct debit directly into a savings fund so you don't even miss the money. What you don't see, you won't spend.

Build up an emergency fund

Unforeseen expenses, such as the costs of an accident or medical emergency can set you back financially, in the worst case forcing you to take out a loan to cover the expenses.

You want to build up an emergency fund over time to use in cases such as these.

Put an amount into an account that is not necessarily your day-to-day account, but which you can access at short notice.

You could also use these savings to cover day-to-day living expenses should you lose your job.

If you're retrenched, you want to be able to cover your living costs, including repayments on debt, such as your home loan, so ensure that you have suitable and reasonable insurance cover which includes credit life insurance.

Shop around for the best policy in terms of cost and type of cover.

Don't be tempted to dip into your emergency fund for "I want" expenses like shoes, clothes or a night out.

Pay off your debt first

In order to be able to save, you need to try to pay off your debt first.

There's little point in paying high interest rates on your borrowings while trying to save.

But it doesn't have to be an either or situation. For instance you could be setting aside money each month to pay off your home loan, while also contributing to a retirement annuity.

Pay all your debts on time to avoid penalties and a negative credit record.

Pay more than the required instalment on all your debts and if you want to reduce your debt levels, tackle the debt with the highest interest rate payments first - credit and store cards or personal loans and then longer term loans, such as car and home loans.

Should you be struggling with debt repayments, do not wait for the arrears to build up before you approach your creditors. It is difficult to negotiate if legal action has already commenced.

Early action from your side will more likely lead to a solution and save you nights of worry and stress.

Cut back

One of the main reasons people battle to save money is that they can't or won't change their spending habits.

It's a bit like dieting: cutting back on electricity usage, ditching the expensive cellphone, using discount coupons at the supermarket or resisting buying that pair of designer shoes are all simple ways to save.

It's as simple as making sure that your income covers your expenses. If you can't afford to pay for it without borrowing, you probably don't need it.

Saving up to buy that new TV or lounge suite rather than taking out expensive credit, is not only financially clever, it can be a truly satisfying purchasing experience too.

Pay attention to detail

Often you can save simply by being more diligent with your paperwork. By going through your bank account each month, you may pick up incorrect payments or unnecessary fees.

Keep all paperwork on file so you can compare your expenses and income month-to-month and have a track record should something go wrong.